Reflections on the Drivers and Development Prospects of African Stock Markets

Recent press reports have commented on the limitations of the stock markets in Francophone Africa[1], underlining their low levels of development compared to their Anglophone counterparts. These reports further draw some form of a causal link between language and financial sector development.
There is no doubt that the most dynamic African stock markets are located in the Anglophone countries. However, there is a need for a deeper analysis of the discourse that defines the relationship between the use of language (as a manifestation of the cultural environment) and the development of financial markets.
This article therefore presents a brief assessment of the African stock market highlighting their performance and the opportunities they offer.
Overview
About 94% of the world’s population live in countries with a functioning stock market[2]. In Africa, although several countries have stock markets that have been established for the past fifteen years, these markets have experienced delays in gaining firm footholds in their countries most notably in DRC, Madagascar, Mauritania, Somalia, Eritrea, Guinea and Burundi. Despite these shortcomings, several of these countries have unveiled plans to establish stock exchanges, most often under the impetus of the Central Banks.
Not all existing African stock markets have the same levels of maturity. The table below presents an overview of the top 10 markets in Africa. The figures are based on the latest available data on capitalisation, liquidity and trading volume[3]:

	A	B	C	C/B
	PIB	Capitalisation	Transactions	Liquidité	Sociétés Cotées
SA	345 775	789 037	370 192	47%	395
Egypt	222 295	48 682	15 984	33%	233
Nigeria	218 562	39 028	3 912	10%	194
Marocco	96 142	60 088	4 366	7%	76
WAEMU	72 836	6 188	115	2%	39
Libya	71 781	3 104	440	14%	12
Tunisia	43 544	9 662	1 051	11%	57
Kenya	29 683	10 203	917	9%	58
Ghana	29 667	2 948	102	3%	35
Zambia	11 084	1 185	151	5%	21

It is worth noting that the most developed stock market in terms of volume is
Anglophone, a factor warranting further discussion.
Critical Drivers of Stock Market Development
If the determination of the growth of an economy depends on the efficiency of the stock exchange markets, then it is the decisions of policy makers and private sector initiatives that will further impact this development. Public policies promoting a market economy can provide a favourable environment for stock market growth and development, and most importantly, improve people’s living conditions.
The critical drivers of stock market development are that allow the deluding affects that are a consequence of supply and demand of the listed shares, ensuring the efficiency, liquidity and safety of the African stock markets. Smaller markets on the other hand, tend not to meet three essential criteria, frequently applied in comparative analyses, without presenting any structural risks. The three criteria are as follows:

• Level of primary market activity and the associated market capitalisation;
• Stock market index trends’ impact on market capitalisation; and
• Reasonable and predictable transaction costs in the secondary market.

However, market comparison analysis needs to be applied beyond volumetric factors, and should include criteria such as economic usefulness and/or the quality of service provisions. For example, when comparing the market activities in Ghana and the WAEMU – often cited as modern examples for developing Anglophone and Francophone markets - the following qualitative criteria must be incorporated in the analysis:

• Spread of Market capitalisation: 80% of Ghana’s market capitalisation is based on only 3 companies, compared to 15 in BRVM, therefore increasing the vulnerability of the GSE to only a few firms;
• The impact
  of the market on the underlying economy: The decision-making organs of the three largest listed companies in Ghana are not based in Ghana. These companies are also listed on international exchanges[1]. This arrangement further increases the Ghanaian market’s vulnerability.
• Representativeness of the economy: WAEMU’s stock market falls short of reflecting and thus representing the sub-regional economies of which it is comprised, in terms of geography (31 out of 37 listed companies are Ivorian), size (the average company size on the market is approximately 150 billion FCFA (USD300 million) however the economic fabric is comprised of companies that are much smaller), and sector (no mining company is currently listed). Ghana’s economy is better represented on Accra’s stock market than on WAEMU’s, which is comprised of companies covering an array of business segments and varying company sizes[2];
• Market liquidity: Generally, the more liquid a market and the more shares that are distributed to private investors, the less volatile the market and the less susceptible it is to external shocks. In this regard, private investors should be preferred during the issue of new securities as well as on the secondary market. Additionally, to increase the allocation of shares to private investors, it is important to have regulations facilitating the lowering of the nominal value of shares.

Beyond the qualitative and volumetric analyses, should stock market efficiency not be the main concern for policy makers? Should
the stock exchange be used
as an institutional device or as a policy driver for economic growth?
Establishing a stock market enables for example:

• International issuers to increase their investments in a country; ·
  
  
  
  
  
• Manufacturing companies and non-financial commercial companies to increase their long-term funds at low costs and without currency risk;
• Governments to access capital by privatisation;
• Governments to diversify and expand financing opportunities without the currency risk faced when borrowing in foreign currencies.

African countries are increasingly issuing bonds on international and regional financial markets. A few notable examples:

• Senegal issued a bond on the WAEMU’s BRVM in 2012, raising the equivalent of USD 175 million over 7 years at 6.7%;
• Rwanda chose to issue its first bond in early 2013. The transaction worth USD 400 million over 10 years on the international markets at 6.625%.

In the face of limited fiscal resources and declining foreign aid, the reponses of Senegal and Rwanda could not have been more different:

• By issuing a bond on the regional financial market, while opening it to the international markets, Senegal raised funds and revitalized its markets. In addition, there is no currency risk and annual coupons payments will lead to a 54% supply to resident accounts, having a driving effect on the national economy;
• By issuing on the international markets, Rwanda secured a better rate than it would have obtained on the domestic markets, which would have amounted to nearly 20% of its national budget. However, this strategy is not without currency risks as it obliges the Rwandese government to settle nearly all coupons abroad without having a dynamic impact on its financial markets.

Without analysing the sustainability of public debt in a given country, we suggest that they should focus on elements that are less quantifiable but are nevertheless relevant, such as recycling the induced effects of a bond issue in their economy and consider currency risks. Stock markets can have an impact beyond the securities that are listed, as shown in the examples below:

• With funds from a bond issue, a government can improve the production and distribution of water and electricity, thus improving its economy and daily life of inhabitants;
• A situation where a commercial bank finances a company's investment and with a bond issue of similar duration, the company indirectly benefits from this stock market operation. In the absence of stock markets, commercial banks would only finance short term operations thus impeding on economic development;
• The quality of insurer offer improves thanks to more liquid backing products, the insured indirectly benefit from the stock market.

Analysing these concrete situations shows that African stock markets, even in their early stages of development, are far from being just imitations or reactions to international trends. In less than ten years existence, even the most modest of stock markets in Central Africa issued, a bond amounting to 500
billion XAF. The few public and private listed securities contributed in adjusting the technical provisions framework for the insurance companies in the sub-region.
African stock markets opportunities
The prospects for development of African stock markets are real, provided they establish operating rules that are adapted to the cultural, economic and financial reality that surrounds them.
In addition to national stock markets, some zones set up regional stock markets, in order to support their economic integration. Francophone stock markets are leaders in this regard, enabling wider securities markets for member countries with integrated economic, legal and monetary systems. This model has been applied
in different ways:

• The WAEMU is a world leader in this regard, with a regional stock market bringing together 8 countries for the past fifteen years, built on a national framework that has been active since the mid-70s. Its existence allowed several countries to raise long-term local currency financing without having to pay for a national stock market. Its growth potential remains high;
• CAEMC faces a very different situation, due to the absence of a stock market tradition, and, paradoxically, to the existence of two stock markets for the past 10 years, one in Douala for Cameroon, the other in Libreville with regional outreach. This situation has hindered the growth of stock market activity in CAEMC; the circumstances surrounding the introduction of the Cameroonian market of the SIAT Gabon to be listed on the Libreville BVMAC is an example of this difficulty;
• The EAC is characterised by the existence of several stock markets – in Uganda, Tanzania, Kenya, Rwanda – as well as a proposed stock market in Burundi. Several companies are listed on multiple markets in the EAC – 7 out of the 15 companies in Uganda, for example, are Kenyan companies that are also listed in Nairobi.

These examples show that regional stock markets must be based on real economic and financial infrastructure, supported by a long tradition of trade and a strong will to unite. This would thus support the recent trend towards increased economic integration with an adequate and innovative joint financial infrastructure.
As we have seen, it appears that the Franc zone offers plenty of opportunities, including at the continental level, thus refuting the inability of the francophone countries to develop its financial activities. Simplot KWENDA FEUTAT

Pierre-Yves AUBERT

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[1]
Pourquoi les bourses francophones déçoivent? (About francophone stock exchange low performances). Jeune Afrique, 8th March 2013
; Afrique de l’Ouest
: la stratégie de la BRVM en débat (Questioning BRVM, WAEMU regional stock exchange strategy). Jeune Afrique, 21st March 2012. La zone Franc dans un étau, entre blocages culturels et manque de volonté politique (Stock exchange: the Franc zone strangleholded between cultural locks and missing political will). Jeune Afrique, 11th
January 2012.

[2] Source
: One half-billion shareholders and counting
: Determinants of individual share ownership around the world – P. Grout, W. Megginson, A. Zalewska – Septembre 2009

[3] AfDB Pocketbook 2012 and WFE Database. All figures are in USD.

[4] Tullow Oil Plc based in London is listed on the London Stock Exchange. Anglogold Ashanti Ltd is listed among others in South Africa, in the USA, in London, and in Australia. ETI based in Togo is listed at the BRVM and in Nigeria.

[5]
Middle-sized companies in the printing and fruit juice sectors are being listed.